Presentation on Overhead Costing

1. Overhead Costing

2. Contents
 Classifications of Overhead
 Ways of assigning overhead cost
 Predetermined Overhead rate
 High Low method analysis
 Overhead applying systems through Absorption & variable costing
 ABC costing
 Steps of ABC costing
 Under applied & Over applied overhead

3. Types of Overhead
By Behavior
• Variable
• Fixed
• Semi-Variable
By Function
• Manufacturing
• Selling & Distribution
• Administrative
By Element
• Indirect Materials
• Indirect Labor
• Indirect Expenses

4. Overhead Costing
 Overhead Applied using Predetermined Overhead Rate
 Analysis of semi-variable overhead cost using High Low Method
 Manufacturing OH assigned to product under Absorption & Variable costing
 Activity Based Costing
 Under applied & Over applied Overhead

5. Overhead Applied using Predetermined
Overhead Rate
Predetermined Overhead Rate
 An allocation rate to apply the estimated manufacturing overhead to specific jobs
 Formula of Predetermined Overhead Rate
 Overhead Applied to jobs
Predetermined Overhead
Rate
=
Estimated Total Manufacturing OH cost
Estimated total amount of Allocation base
Predetermined Overhead
Rate X Actual Allocation base assigned to Jobs

6. Analysis of Semi-variable Cost
Using High Low Method
High Low method : A technique to split fixed overhead & variable
overhead from mixed overhead cost (Semi-variable)
Cost Formula : Y = a + bx
 Where Y represents total cost
 X represents activity level,
 a represents fixed portion
 b represents variable portion
Variable cost Portion b,=
Fixed Cost Portion a, =
Cost Formula
y
x
Y= a+bx
b
a
Change in Cost
Change in Activity
Total Cost – variable Cost

7. Example of High Low Method
Month Activity
level
Overhead
Cost
January 9800 $ 14,740
February 7000 $ 11,100
March 8500 $ 13,250
April 7600 $ 12,500
 High Activity Level = 9,800
 Low Activity Level = 7,000
 Change in activity = ( 9800-7000) = 2,800
 Change in Cost = ($ 14,740 - $ 11,100) = $ 3,640
 Variable Cost per activity, b = ( $ 3,640 / 2,800 ) = $ 1.30
 Fixed Cost at 7000 Activity, a = $ 11,100 – (7,000 x $
1.30) = $ 2,000
 Cost Formula , Y = $ 2,000 + $ 1.30x

8. Manufacturing OH assigned to
product under Absorption &
Variable costing
In Absorption Costing
 Variable Manufacturing Overhead is Product Cost
 Fixed Manufacturing Overhead is Product Cost
In Variable Costing
 Variable Manufacturing Overhead is Product Cost
 Fixed Manufacturing Overhead is Period Cost

9. Manufacturing OH assigned to product
under Absorption & Variable costing
(Cont.……)
Name of the Cost Cost per
Unit
Direct Materials $ 5.00
Direct Labors $ 4.00
Variable
Manufacturing
Overhead
$ 2.00
Fixed Manufacturing
Overhead
$ 4.00
Here,
Under Absorption Costing
 Total Product Cost per unit = ( Direct
Materials + Direct Labor + Variable MOH +
Fixed MOH ) = $ 15.00
Under Variable Costing
 Total Product Cost per unit = ( Direct
Materials + Direct Labor + Variable MOH) =
$ 11.00

10. Activity Based Costing
 A method for assigning overhead & indirect cost to related Product & Service
 focuses on allocation of indirect cost
 relates with internal decision making perspective
 Identifies different cost pool and driver related to particular goods or services
 Accumulates all relevant cost to the particular goods or services

11. Steps of Activity Based Costing
Defines activities , activity cost
pool & activity measures
Assign overhead cost to cost
pool
Calculate activity rates
Assign overhead cost to cost
objects
Prepare Reports

12. Important Elements of ABC Costing
Cost Pool
 A strategy to identify a cost incurred by individual departments
 Example : Order Size, Machine maintenance
Cost Drivers
 Activities that drives , creates or causes cost to incur
 Example : Number of customer order, Machine hour etc.
Activity Rate = Activity cost pool
Cost Drivers / Total Activities

13. Example of ABC Costing
 A firm produces two products, following one month data of the firms
 Budgeted Factory Overhead’s information
Particulars Product X Product Y
Machine hour 25000 H 7000 H
Number of orders 20 60
Number of Production run 12 36
Particulars Amount ($)
Machine maintenance $ 264,000
Ordering Cost $ 54,000
Production run cost $ 24,000
Total $ 342,000

14. Example of ABC Costing (Cont.……)
 Calculating Activity Rates
 Assign Overhead Cost to Product X
Cost Pool Cost Driver Activity Rate
Machine maintenance Machine hour per unit $ 8.25 Per Hour
Ordering Cost Number of orders $ 675 per order
Production run cost Number of Production run $ 500 Per Production Run
Particulars Amount
Machine maintenance ( $ 8.25*25000) $ 206,250
Ordering Cost ( $ 675* 20 ) $ 13,500
Production run cost ( $ 500 * 12) $ 6,000
Total Assign Overhead Cost to Product x $ 225,750

15. Example of ABC Costing (Cont.……)
 Assign Overhead Cost to Product Y
Particulars Amount
Machine maintenance ( $ 8.25*7000) $ 57,750
Ordering Cost ( $ 675* 60 ) $ 40,500
Production run cost ( $ 500 * 36) $ 18,000
Total Assign Overhead Cost to Product Y $ 116,250

16. Under applied & Over
applied Overhead
Overhead is under applied when ,
 Applied / Budgeted Overhead < Actual Overhead spent on operation
Overhead is over applied when ,
 Applied / Budgeted Overhead > Actual Overhead spent on operation

17. Question Section